Posed with questions around the casual-dining brand's slower performance, the chief executive noted that lower-income guests aren't making that much of an impact and that the casual-dining giant is comparing against steep discounting prior to the pandemic. 

Darden CEO Rick Cardenas could sense a common theme as analysts peppered him and CFO Raj Vennam with inquiries during the company’s recent Q1 earnings call. 

“We’re getting a lot of questions on traffic at Olive Garden,” the chief executive pointed out.

There’s a reason why. Olive Garden has seen a recent decline in visits from customers with household incomes below $50,000, a movement multiple brands have experienced across quick service and casual dining. Same-store sales grew 2.3 percent in Q1, a quarter-over-quarter slowdown from the 6.5 percent rise in Q4, and traffic is down 9 percent versus pre-pandemic comparisons. Because of the inflationary environment, segment profit decreased to $216.1 million year-over-year, down from $253.3 million in the year-ago period. 

But Cardenas said there’s context to consider. In terms of traffic, Olive Garden is comping against a Q1 2020 that used a BOGO offer for roughly nine weeks and another promotion that had high couponing. The pre-COVID marketing and promotional activities drove double-digit traffic.

Moving forward, the brand will be selective in bringing promotional activity back. Anything that’s introduced will be evaluated through three must-haves—elevate brand equity, simple to execute, and not at a deep discount. 

“Some of those guests that we were doing in these dining rooms [pre-pandemic] might not have been as profitable as we’d like, right?” Cardenas said. “We had a lot of coupons. There were times that we had five coupons in one week at Olive Garden when we were running Never Ending Pasta Bowl, right? And so we had to ask ourselves, is that the right thing to do to drive traffic just to have a full restaurant if that traffic really isn’t very profitable? We do a lot of work when they’re there. And so are we better off with a loyal guest that doesn’t need all of those discounts to come in, and we can serve them?”

Cardenas also emphasized $50,000-income consumers make up just a portion of Olive Garden. The brand is performing well with guests above $100,000 as it benefits from trade-down. 

“Let’s not read into it that we’re seeing a huge, huge reduction in that consumer. We’re seeing a little bit of change in the behavior from that consumer, but not huge,” Cardenas explained. “We don’t want to change what we do just to capture a segment of the population. We want to continue to focus in on what we’ve been doing at Olive Garden—earn one more visit from a loyal guest. And our loyal guest spans a lot of income levels, and so anything we do is going to help drive more loyalty from our existing guests.”

READ MORE: Darden CEO: M&A is Always on the Table

As for Darden’s other brands, same-store sales rose 7.6 percent for the other business segment (Bahama Breeze, Yard House, Cheddar’s Scratch Kitchen, and Seasons 52), and the fine-dining segment (Eddie V’s and Capital Grille). At LongHorn Steakhouse, comps rose 4.2 percent. Cardenas noted that each of the categories has benefited from growth in the higher-income guest. 

“We have a portfolio of brands that kind of run the spectrum of the consumer,” the chief executive said. “And so when one segment of the population isn’t doing as well, the other segment is, then we are still OK. And then if it flips the other way, we’re OK. And so right now, there’s just one segment of the population that’s being hurt a little bit more by inflation than others. And the good news is we’ve got brands that aren’t impacted by that.”

Vennam agreed, saying the lower-income erosion isn’t meaningful enough to say there’s been pushback on pricing. In Q1, Darden saw 9.5 percent inflation and carried 6.5 percent pricing, an almost 300-basis-point gap. Significantly pricing below inflation pressured the P&L and cut margins and profit. However, the company believes the gap between pricing and inflation peaked in the first quarter.

The expectation is that inflation will moderate throughout the fiscal year and pricing should catch up. Because of this movement, margins are projected to decline less in Q2 and grow year-over-year in the back half of the fiscal year. It’s important to note, Olive Garden doesn’t see a big difference in profitability between the dining room and takeout, so mix changes doesn’t have a material impact. To-go accounted for 24 percent of sales at Olive Garden in the first quarter. For Darden overall, digital transactions represented 62 percent of off-premises orders and 10 percent of total orders. 

READ MORE: Olive Garden Hit Hard by COVID in January

Compared to the rest of the industry, Darden is in an even better position. Over a three-year stretch, Olive Garden’s prices have risen 10 percent, versus 17.5 percent across casual-dining, Vennam said. 

“That is the way we believe to build back that guest,” Vennam said. “And Rick [Cardenas] mentioned getting that one extra visit from our loyal guest. We think this is a sustainable, durable way to really get our guests back. It’s going to take time. It’s not one magic, let’s drive people in today or tomorrow. It’s just going to happen over time. And I would argue that we’re starting to see the fruit of some of that, but it takes time.”

Cardenas said Olive Garden’s guest satisfaction metrics are near all-time highs, and a big part of that has been improved staffing levels. Thanks to a new talent management system that allows applicants to automatically schedule interviews, some restaurants are actually looking to reduce application flow. Management retention is much closer to pre-COVID levels and above the industry average, the CEO said. Team member retention is above the industry average, as well, but not quite back to pre-pandemic marks. 

Olive Garden’s average weekly sales per restaurant was $98,222, 1.4 percent better than pre-COVID. LongHorn’s was $84,916, 26 percent growth; fine dining was $157,834, 20.2 percent growth; and all other brands were $116,702, 8.8 percent growth. 

Darden’s total sales increased 6.1 percent to $2.4 billion in the first quarter and opened 34 net new restaurants. Olive Garden finished Q1 with 887 locations, followed by LongHorn (549), Cheddar’s (174), Yard House (85), The Capital Grille (61), Seasons 52 (45), Bahama Breeze (42), Eddie V’s (29), and The Capital Burger (three). 

The company’s fiscal 2023 projections remain the same—total sales of $10.2 billion to $10.4 billion, same-store sales growth of 4 to 6 percent, 55 to 60 restaurant openings, capital spending of $500 to $600 million, and inflation of roughly 6 percent. 

Chain Restaurants, Feature, Finance, Olive Garden